Monday, June 25, 2012

DB projects consumer deleveraging will be complete within two years

Deutsche Bank's latest research on US consumer leverage suggests that the deleveraging process may have another couple of years to run. They determined the long-term trend line based on consumer debt to GDP ratio from 1953 to 2003, thus excluding the bubble years. Then they compared the current leverage to this line and looked at the rate of convergence. The intersection with the trend line is expected to take place in a year.

To be on the conservative side, they also assumed another year for the leverage ratio to overshoot to the downside and/or the nominal GDP to grow at slower rate than 4%. Note that the 4.0% nominal US GDP growth projection is not unrealistic (that's roughly where it has been recently). They verified this result by repeating the exercise using debt to disposable income measure rather than debt to GDP.

DB: - ... extrapolating the current trend further,
household debt to GDP would intersect its long-term
trend line by Q3 2013. It may be that households
overcompensate, or nominal growth is less than 4.0%
so we are conservatively estimating two years for the
end of the deleveraging process. The story is broadly
similar when comparing household debt to gross
disposable income. This ratio has declined from a peak
of 123% in Q1 2009 to 107% as of Q1 2012—the
lowest level since Q3 2003 (106%). This tells us that
consumers are nearing the end of the deleveraging
process.